White House Releases FY 2013 Budget

February 13, 2012

Government Relations Update

Today, President Barack Obama released his budget for fiscal 2013, which begins on October 1st, 2012. This budget is the first released after last year's Budget Control Act, which imposed discretionary spending caps and set in motion a process for automatic spending cuts, or "sequestration." As a result, spending projected in the fiscal 2013 budget is significantly less during the next decade compared with the president's previous budget proposals. Under the proposed budget, most federal agencies would see their budgets cut or essentially frozen. The budget proposes total outlays of $3.8 trillion, virtually matching the estimated fiscal 2012 spending level.

With the threat of sequestration looming in January 2013, Congress may be just as willing as the White House to move forward with reduced spending, though how they will get there remains uncertain. While Obama’s proposal is not expected to pass either chamber of Congress, it will provide a platform for Obama’s campaign as the president battles with the GOP for control of Washington. President Obama has already drawn immediate Republican fire for glossing over big-ticket structural reforms of entitlement programs such as Medicare, Medicaid, and Social Security or tackling tax reform. This is unsurprising; it would be unlikely for any President to touch upon entitlements in his final budget before running for re-election.

Timeline

Beginning tomorrow, Congressional committees will hold hearings on the President’s budget request. April 15 is the first benchmark in the budget timeline, which is the statutory deadline (though frequently missed) for Congress to complete its annual budget resolution. That resolution sets a limit on discretionary spending and may include instructions for a reconciliation bill. May 15 is the date after which the House may consider fiscal 2013 appropriations bills even if a final budget resolution has not been adopted.

July 2is the informal deadline that House leaders set for passing all 12 regular appropriations bills. Mid-July is the target for the President to submit his mid-session review of the budget to Congress, including revised deficit estimates. August 6 is the beginning of the Senate’s summer recess, and the Senate’s informal deadline for passing all 12 spending bills. Mid-August is the target for the Congressional Budget Office to issue updated budget projections.

On September 10, the House and Senate return from summer recess with 18 days to negotiate their differences and clear all appropriations bills before the new fiscal year begins. On October 1, fiscal 2013 begins, and a stopgap continuing resolution would be required to finance any agency whose appropriations bill has not been enacted.

Taxes

The budget proposes revenue levels of $2.9 trillion, up from an estimated $2.47 trillion this year. In doing so, the budget calls for an overhaul of the corporate tax system that would eliminate tax benefits to lower the rate from the current maximum of 35 percent. While there is not any detail on the rate or which tax provisions would be eliminated, those details are set to be released later this month. The budget also reiterates Obama’s proposal to tax so-called carried-interest income earned by hedge fund managers and private equity partners at ordinary income rates, rather than at the 15 percent capital gains rate, raising $13 billion over a decade.

Small businesses would be in line for $25 billion in various tax cuts, including ending capital gains taxes on small business stockpiles. Expensing provisions scheduled to expire Dec. 31 would be extended through calendar 2013, for a value of $26 billion. The budget would also extend an expiring payroll tax break for the rest of this year.

Obama’s deficit projections depend on allowing expiration of Bush-era tax cuts for couples earning $250,000 or more a year, limiting the value of itemized deductions to 28 percent for those families, and imposing a minimum tax for individuals with annual incomes of at least $1 million. It would also raise taxes on dividends received by the wealthy to 39.6 percent from the current 15 percent. The minimum tax on $1 million-earners would replace the Alternative Minimum Tax (AMT). The plan does not give a detailed proposal for the tax beyond setting a 30 percent threshold for the minimum rate.

Defense

Under the proposed budget, the Pentagon would receive $525 billion, about $5 billion less than last year. Funding for the F-35 Joint Strike Fighter, the military’s costliest weapons program, would fall by $1.6 billion. The budget also makes adjustments to programs that develop and procure military equipment by enhancing contract competition and reevaluating modernization programs. Unlike the FY 2012 budget where military departments were authorized to keep their savings of $100 billion and invest them in high priority requirements, in FY 2013, $61 billion will be applied to deficit reduction. Additionally, the Department of Veterans Affairs would see a 4 percent increase, to $61 billion, in part because of growing medical care costs.

Transportation and Infrastructure

The budget proposes a six-year, $476 billion surface transportation reauthorization bill, with an upfront investment of $50 billion from the surface transportation reauthorization bill for roads, rails, and runways. This level is higher than both the Senate and House proposed highway reauthorization bills currently being considered in Congress, and is expanded to included inter-city passenger rail. These funding levels would be paid for through current user-financed mechanisms and part of the savings from ending the war in Iraq and winding down operations in Afghanistan.The budget supports the Federal Transit Administration New Starts and Smalls Starts programs, by providing funding for existing, pending, and new full-funding grant agreements. The budget also calls for a National Infrastructure Bank to fund projects of national importance and supports a more robust, rigorous, and data-driven pipeline safety program.

Education

The Department of Education, one of the only agencies to see a funding increase in the proposed budget, would see a 3.5 percent increase to $69.8 billion. The administration’s “Race to the Top” program, which awards competitive grants to states, would receive a 55 percent increase and would be expanded to reform higher education. Funding for college work-study programs would increase by 15 percent. The budget also includes $30 billion to modernize at least 35,000 schools and $30 billion to help states and localities retain and hire teachers and first responders, as well as a new $5 billion competitive program that will challenge states and districts to work with their teachers and unions to attract, prepare, and reward great teachers to help students learn. The budget also sustains the maximum Pell Grant award of $5,635 through the 2014-2015 award year. The budget also creates a Pathways Back to Work Fund, which will support summer and year-round jobs for low-income youth, and will help connect the long-term unemployed and low-income adults to subsidized employment and work-based training opportunities.

Financial Services

Most of the agencies that enforce Dodd-Frank are not included in top-line budget items because they are funded through fees and assessments on the companies they regulate. Among those fees is the Financial Crisis Responsibility Fee, which is assessed on the largest financial institutions to fully compensate taxpayers for their support during the Troubled Asset Relief Program (TARP) process. The Financial Crisis Responsibility Fee would raise $61 billion over 10 years and is intended to offset the cost of TARP and the President’s mortgage refinancing program. Information for the spending, staffing and fees of enforcement agencies is provided in the budget as a road map for how the President wants the Consumer Financial Protection Bureau, the Commodity Futures Trading Commission, the Financial Stability Oversight Council and other regulators to operate. The Dodd-Frank Wall Street Reform Act also grants the bureau’s director, Richard Cordray, the authority to request up to $200 million in congressional appropriations each year, but the agency has said it is not asking for the extra funding in fiscal year 2013. The budget also proposes debt collection legislative reforms to increase collections over the next 10 years from individuals and businesses that have failed to pay taxes or repay government loans.

Healthcare

The budget would require pharmaceutical companies to provide bigger rebates on drugs sold through Medicare, reduce federal reimbursements for patients’ bad debts and cut payments to teaching hospitals, among other changes. Savings are achieved through trade-offs such as the consolidation of environmental health and substance abuse prevention grant programs. It would also cut $51 billion out of Medicaid, the joint federal-state health care program for the poor, in part by shifting more of the program’s costs to the states.

Energy and Environment

The Environment Protection Agency’s budget would shrink by 2 percent to $8.3 billion. President Obama would end credits and deductions that help subsidize the oil and natural gas industries, for a savings of $41 billion over a decade, and increase support to States and Tribes by approximately $93 million for implementation of delegated air quality management and water pollution control programs. The budget supports the goals of: putting one million electric vehicles on the road by 2015; doubling share of electricity from clean energy sources by 2035; and reducing buildings’ energy use by 20 percent by 2020. The budget also eliminates 12 tax breaks to oil, gas, and coal companies that will raise $41 billion over 10 years. The budget also maintains and expands funding for the Advanced Research Projects Agency-Energy.

Technology and Research

The budget expands and makes permanent the Research and Development Tax Credit. $2.2 billion will be dedicated for advanced manufacturing R&D, which represents a 19 percent increase over 2012. Further, the budget reprises last year's push for spectrum incentive auctions and a nationwide network for public safety agencies. In addition, it increases funding for next-generation wireless broadband that is interoperable for public safety purposes. The Administration also proposes $19 million for the new public-private “Innovation Corps” program at the National Science Foundation aimed at bringing together the technological, entrepreneurial, and business know-how necessary to bring discoveries ripe for innovation out of the university lab.